Economics Assignment: Business Expansion Of ACME Plc In Germany Market
Question
Task: You are required to complete the following economics assignment; Acme Plc* is a small UK owned company that is intent on international expansion. Select a country of your choice, analyse the FDI available and prepare a report for management that assesses how ‘attractive’ that country would be to ACME Plc.
*ACME is a fictional company; it does not exist. Students are required to substitute it with a real-life example of a small medium Enterprise (SME) UK-owned company.
Answer
Introduction:
DSA Manufacturing is the selected small clothing manufacturing company and the company wants to expand their business into Germany in June 2022. The economics assignmentaims to identify and critically evaluate the four most immediate macro-environmental factors including Political Environment, Economic Environment, Social Environment and Technological Environment. It critically assesses the attractiveness of the Country to make it easy for the selected clothing manufacturer company to make their decision to internationalise their business. The report's purpose is to critically evaluate the opportunities and threats of each macro business environmental factor and possible impacts of these factors while expanding and operating their business into the market of Germany.
Background of the Company:
DSA Manufacturing Company was founded in 2014. It started its business as a manufacturing agency by connecting male streetwear brands and high-quality manufacturers throughout the world. Over the years, the company evolved and also started assessing denimwear, headwear, team wear, womenswear, children swear and corporate wear projects. The company also offers services of web design, CAD design, tech packs, photoshoots and digital marketing. The company also has their own factory located in Istanbul and also working with external factoring for manufacturing some of the products (DSA Manufacturing. 2022). It allows the company to bring 90% of their manufacturing of the products in house. The company aims to offer the highest possible level of services to their clients with their core UK team. The company specialise in Menswear, Womenswear, Teamwear, Childrenswear, Sportswear, Garment Design, Digital Marketing and Web Design. The annual turnover of the company is less than $5 million. The company emphasises the high-quality standards of their products and also focuses on corporate social responsibility policies to be competitive in the market.
Internationalisation is the process of designing a product in an efficient way to make it ready for consumption across multiple countries. Currently, the company aims to expand their business from their domestic market to the market of the mainland European Country Germany. It will grant true independence from the business cycle of the local market and access the broader market to improve the social image of the company. The study aims to analyse and evaluate the opportunities and threats of the political, economic, social and technological environment of Germany and its impact on the business operation of the DSA Manufacturing.
Identification and Critical evaluation of Macro Business Environmental Factors:
Political Impacts:
Fig 1: Democratic index of Germany
Source: (Statista. 2022)
Germany’s political system is considered as the federal republic democratic country with strong political parties, powerful regional and local government and independent judiciary. Based on the concept of the root model political risks, Germany is considered as a politically stable country. It is ranking no. 9 for perceiving political stability. Moreover, Germany is one of the most successful Countries in Covid-19 responses.
Fig 2: Political Stability in Germany
Source: (TheGlobalEconomy.com. 2022-a)
The average value of the political stability of Germany was around 0.67 points in 2020 (TheGlobalEconomy.com. 2022-a). Moreover, the UK and German relationship are close, based on totally mutual trust and multi-faceted. Both countries have strong trade and investment relationships in the aspect of the security policy (Völlerset al., 2021). Moreover, Germany is the close strategic partner of the United States that improves its business-friendly market for any international business (auswaertiges-amt.de 2022).The transfer and currency inconvertibility risks are low in Germany. It indicates the risk of converting foreign currency into the local currency while transferring products and goods outside of the company’s host country is approximately low (TheGlobalEconomy.com. 2022-b). It is also an opportunity for the company to easily converts their foreign currency into Germany’s local currency.
The expropriation risk of Germany is also low. Germany contains the lowest value 1 index points in the expropriation risk index. It indicates the loss of investment due to any illegal and discriminatory act by the German Government that may deprive the investor without any appropriate and adequate compensation is low.The Control of corruption is also high in Germany. It acquires 1.86 points in the control of corruption graph (TheGlobalEconomy.com. 2022-c). It indicates that the risk of facing issues like bribery and other corrupt practices while carrying out the businesses by the foreign companies is also low (TheGlobalEconomy.com. 2022-d). The German Government takes necessary action for securing the major contracts while expanding the foreign business in Germany (Thomas, 2019).
The risk of terrorism is also moderate in Germany. Based on the report of Trading Economics, in the terrorism index, Germany scored 3.97 (Tradingeconomics.com. 2022). It indicates that the risk of loss of life and property destruction by the terror attacks involving biological, chemical and cyber weapons can create issues in the operating activities of the DSA Manufacturing Company (Larkin, 2020). However, Brexit creates an impact on the trade business between UK and Germany. The withdrawal of the United Kingdom from the European Union increases the consequences for the UK companies, which have a business relationship with the UK. It increases custom duties and non-tariff barriers in the trade relations between Germany and UK that may lead to fluctuations in sales in the business in international markets. The Government of Germany can also apply the MFN tariffs in the trade between The UK and the EU country Germany (The Balance. 2022). However, the effect of the Brexit may lead to higher costs for DSA manufacturing companies while doing business in the market of Germany due to high customs duties, higher complexity and tax law efforts in a trade relationship between Germany and The UK. It indicates that it can be a threat for the DSA Manufacturing company because of the higher operating cost in Germany Market. However, the recent study stated that FDI inflows in Germany declined by 34% in 2020 due to the sudden outbreak of the Covid-19 (santandertrade.com 2022).
However, approximately low risks of political instability and violence create a good opportunity for doing business in the Germany Market. It is the biggest opportunity for the DSA Manufacturing Company to operate their business successfully in the market of Germany. Moreover, Germany considers the open investment regime to influence FDI inflows in the German market (santandertrade.com 2022). It is also an opportunity for the company to successfully expand their business in Germany.
Economic Environment:
Germany follows the mixed economy system including private freedom, combined with Government regulation, and centralised economic planning. Germany also allows the free market economy in business services and consumer goods (The Balance. 2022). However, Germany Government sometimes imposes strict regulations to protect the citizens of Germany. Germany is the fourth-largest economy in the world. A free market economy helps in developing the economic system with little and no government control on the supply and demand of the products and services (Ward et al., 2019). It indicates that low governmental intervention in the German economic system, low legislative control over production, pricing and employment enhances the strong economic bond of Germany. It is an opportunity for the DSA Manufacturing Company to successfully expand their business with the facility's strong economic structure. The GDP Growth rate of Germany was 3.05% in 2021. It is also expected to grow by 4.56% in 2022.
Fig 3: GDP Growth Rate in Germany
Source: (Statista. 2022-f)
GDP growth rate is directly connected with the economic growth of the country that also increases the capacity of the state and the supply of public goods. The strong economy of the country also enhances the financial ability of the country that increases the standard of living of the people. As a result, it increases the spending power of the people in Germany. Higher GDP growth increases the funding from governments on public services and healthcare services. The regional economic growth also reduces the unemployment rate of the country that decline the poverty rate of the country directly (Shutter et al., 2022). It is the opportunity for the company to expand their business successfully and create demand among the citizen of Germany by offering them high-quality clothing garments to the people.
Fig 4: Inflation Rate in Germany
Source: (Statista. 2022-e)
The inflation rate of Germany was 2.88% in 2021 and currently, the inflation rate of Germany is 1.51% in 2022. However, the moderate ups and downs in the inflation rate are evidence of the strong production capacity of the country that enables the higher economic growth rate. It also allows the German Government to offer relative wages to the employees of the country. However, the frequent changes in the inflation rate can increase the confusing situation and uncertainty for foreign businesses (Meyer and de Jongh, 2018). It can also increase economic instability in Germany that lowers the growth of the German economy.
Fig 5: GDP Per capita in Germany
Source: (Statista. 2022-d)
The GDP per capita rate of Germany was around 46,215 U.S. Dollars in 2020 and 50787.86 U.S. Dollars in 2021. However, it is expected that GDP per capita will exceed 60000 U.S. dollars by 2025. It indicates the strong economic stability and economic strength of the country. It is the opportunity for the DSA Manufacturing Company to successfully expand their business in the market of Germany. The strong economic bond and stability will help the company to develop an appropriate wage structure for the company. It will increase the incoming rate of a German citizens.
The unemployment rate of Germany was 5.9% in 2020, 5.7% in 2021 and it is expected to decrease by 5.4% in 2022. However, it is direct evidence of the increasing rate of leisure income of the citizens that will help the company to easily influence the citizen and other business clients to acquire their services.
Fig 6: Unemployment rate in Germany
Source: (Statista. 2022-b)
Social Environment:
Germany is considered as the largest consumer market in the European Union with a population of around 82.4 million people. The country also respects the diverse array of customs, religions and traditions to make up the rich national psyche. German society is fully shaped by ethnocultural diversity. The Government of Germany influences the citizens to be thrifty and sensible and respect the privacy of other people and also respect laws and structure of the society to follow the diversified culture within the country. It indicates the degree of tolerance of different cultures and understanding between the different cultural people is high. It enriches the innovation and creativity of the entire community through shared experiences with different cultural people. It is the opportunity for the foreign businesses to influence the different cultural people and be flexible in the market of Germany to attract more citizens and business clients towards their services. The German constitution provides the opportunity to enjoy the freedom of faith and conscience and respect each other religion. It prohibits religious discrimination. The freedom of expression is also high in Germany.
The social market economy of Germany highly follows the market principles in accordance with government regulation. The Country also organises wide-ranging social welfare programs and major trade events such as The Hannover Fair, ITB show of tourism etc. to attract foreign businesses. These are the opportunities for the DSA Marketing Company to make a decision for expanding their business in the market of Germany. The German Government has also pressed the EU commission for reducing the regulatory obstacles and burdens to promote innovation in the business market. However, the EU’s common environmental policy and legal restriction can be barriers for foreign businesses like DSA Manufacturing Company of the UK. Germany is a member of the NATO, United Nations, G20, G7 and other international business and governmental bodies (auswaertiges-amt.de 2022). The bilateral relationship between Germany and the UK helps in developing the strong and vibrant business market in Germany based on a large number of civil society, private and public society links and other activities (Hönigsberg, 2020). It is also the biggest opportunity for DSA manufacturing company to operate their business in the Market of Germany successfully. On the other hand, Brexit can create barriers in the business relationship between the UK and Germany. German fashion trends highly influence the elegant lines, manufacturers of outer clothing and innovative young designs. The capital of Germany, Berlin is the place for young and creative fashion. The German citizens also prefer high quality and high standard of clothing products which is also the biggest advantage for the DSA manufacturing company. Brexit also reduces the number of skilled workforce in Germany. The shortage of skilled and knowledgeable workforce in Germany can create barriers for the company. It can create barriers in the time of manufacturing high quality and standard clothing products.
Fig 7: Literacy rate in Germany
Source: (Statista. 2022-c)
Based on the report of Statista in 2020, 25.3% of the entire population of Germany achieved European baccalaureate including 25.9% of men and 24.7% of women. Moreover, 7.5% of the total population have advanced technical college certificates including 8.5% of men and 6.4% of women. However, the lack of technical knowledge and lack of skilled and knowledgeable employees in the market can be a threat to the company. It can increase the cost of hiring foreign employees for manufacturing the clothes and maintaining the high quality of the products. Moreover, the sudden outbreak of the Covid-19 creates a huge impact on the incoming capability of German citizens and it also creates an impact on many businesses. As a result, it increases the economic inequalities in Germany. It can be a threat for the company because the entire situation reduces the power of purchasing of products by the lower economic – background people.
Technological Environment:
Germany is considered as the largest ICT market across the world and largest software market in entire Europe with an estimate of overall 1.03 million employees in the year 2021. The Government of Germany focuses on digital economy, digital infrastructure, digital environment and workplace in the business manufacturing and production centre, security, society and protection processes (Sabirovet al., 2021). The General data protection Regulation, cybersecurity policies and E-privacy regulation are also strong and proactive in the business market. It is the biggest opportunity for DSA Manufacturing company. It would help the company to utilise the smart social business platform, technological infrastructure, big data and data analytics technology to improve the manufacturing and marketing process of the company. German fashion is the leading example of quality and high value for money. However, it lags behind the creativity of the designs in fashion clothes (Fritsch and Wyrwich, 2021). However, the high quality and standard of the DSA clothing manufacturing company and its creative fashion design is the biggest advantage for the company to expand their business in the market. Germany is also considered as the driver of innovation in producing smart textiles by developing new technologies in this particular area (Fromhold-Eisebithet al., 2021). It would be the biggest opportunity and strength for DSA clothing manufacturing company to smartly operate their business in Germany. The biggest competitors of the DSA clothing Manufacturing company are Corporate Wear Germany, Muller Textil GmbH, Fashion UK Germany GmbH, FALKE, Nubrands Agency, the world of textiles etc. The presence of potential competitors in the German market can also be a threat to the company. It may hamper the contracts between the DSA manufacturing company and other fashion retailers (Gökalpet al., 2018). Moreover, it may also reduce the sale of the DSA manufacturing company in the Germany Market.
Summary of overall analysis:
Based on the overall analysis, it states that Germany is the attractive and appropriate place for DSA clothing manufacturing company to expand their business in the international market. Fashion UK Germany GmbH is the biggest example of a successful UK clothing manufacturing company, which opened a branch in Germany to operate their business in the market of Germany. This company is considered as a unique company with the facility of own in-house UK print facility to meet the needs of the short order across Germany and entire Europe. The company has 20 years’ experience of in Fashion UK and the company is an industry leader in the manufacturing of licensed apparel, accessories and footwear (Fashions-uk.com. 2022). Innovation and creativity help the company to build a strong market in Germany and worldwide. The company also has a connection with global brands like Warner Bros, Disney and Pokemon. Continental Clothing Company GmbH is also another example of a successful UK clothing manufacturing company. The company is an innovator of the women’s fitted T-shirt in Germany and entire Europe (kolfox.com 2022). The high-quality products expertly styled cutting and responsibly manufactured garments are the main strengths of the company to successfully operate their business in Germany. It is determined that a positive and effective market entry strategy would be beneficial for the DSA Clothing Manufacturing Company to successfully expand their business in the market of Germany.
Conclusion:
It concluded that the proper analysis and evaluation of macro business environmental factors would help the DSA Manufacturing Company to successfully expand their business in the clothing manufacturing market of Germany. The overall analysis concluded that political stability, strong economic growth, highly developed technological infrastructure, SMART technology, free-market economy and high demand for high-quality clothing garments is the biggest opportunity for the DSA Manufacturing company to make their decision for expanding their business in Germany. However, the business-friendly environment and large population of the country would be also beneficial for the company to successfully operate their business in Germany.
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